Gold has been an essential component of nations' financial reserves for centuries, and its attractiveness shows no sign of diminishing, as central banks will once again become net buyers of gold this year. In fact, central banks now have more than 35,000 metric tons of metal, about one-fifth of all the gold ever mined. But what is it about gold that has made it such a key asset for so long? Gold reserves in a vault do not accrue interest. To earn some ongoing income, the Reserve Bank can lend its gold.
For more than 30 years, the RBA has been involved in the gold lending market and has sometimes lent almost all of its gold holdings (chart). Over the past decade, RBA's gold lending activity has been lower. The reduction in hedging demands of gold producers, combined with a greater willingness of other investors to lend their gold, has reduced the available return on gold loans. After the verification process, the gold is moved to one of the 122 compartments of the vault, where each compartment contains gold held by a single account holder (meaning that gold doesn't mix between account holders).
Similarly, any gold that the RBA has borrowed is excluded from the RBA's physical gold stocks, according to official reserve data. Gains (or losses) on RBA gold holds are mainly due to changes in the spot value of gold. Stocks in the gold vault continued to rise and peaked in 1973, shortly after the United States suspended the convertibility of dollars into gold for foreign governments. The New York Federal Reserve charges account holders a management fee for gold transactions, even when gold enters or leaves the vault or when their property is transferred (it moves between compartments), but otherwise charges no fees for storing gold.
In addition, the Reserve Bank audits its gold-related processes, including gold holds at the Bank of England. Last year alone, central bank demand for gold reached record levels, bringing global gold reserves to their highest level in nearly 30 years. This simply means that a central bank buys gold directly from a bullion bank or from an internationally recognized gold refinery (for example, the Reserve Bank reevaluates gold holds (including loaned gold) daily to the equivalent in Australian dollars at the 3 p.m. LBMA setting, and revaluation gains and losses are transferred to an asset revaluation reserve on the balance sheet of RBA.
The RBA requires that the redelivery of the gold it has lent be carried out through a physical delivery of the gold to the account assigned to the RBA at the Bank of England (which can be done by a transfer recorded in serial numbered gold bullion books from an account assigned to the Bank of England to the RBA's assigned account at the Bank of England). The BoE holds the gold of the RBA as a beneficiary of the bond; the RBA retains the legal and beneficial title to gold. However, despite the fact that all four countries have purchased substantial quantities of gold over the past decade or so, they still lag behind their Western counterparts, since gold represents only 22 percent of Russia's reserves, while China's stocks, of just under 2000 tons, represent only 3 percent. Table 3.13 indicates the book value of gold deposited with the Federal Reserve Bank of New York for foreign and international accounts in the gold frame intended for specific purposes.
The Reserve Bank's credit risk in its gold transactions is managed only with counterparties that meet strict eligibility criteria, such as the minimum credit ratings of major rating agencies. At the start of each loan, the Reserve Bank and its counterparty will agree on the due date of the transaction, the value of the gold to be exchanged, and the interest rate to be paid. .